Labor and Employment | Council on Foreign Relations

Education

Policy Initiative Spotlight: Adaptive Education

If many technology startups and established education firms have their way, the future of education will more closely resemble a one-on-one private tutor than a traditional schoolhouse classroom with a single teacher lecturing to twenty-five students seated in neatly arranged desks. These firms are developing tools for adaptive education, an approach that analyzes data in real-time to tailor a lesson to each student’s needs and strengths, to reinforce concepts not fully absorbed, and deploy techniques effective for that particular student. New York City’s Department of Education launched School of One (SO1) in 2009 to improve the performance of middle school math students through adaptive education. Pilot programs in three schools throughout NYC deploy a variety of formats, from live online virtual instruction and remote tutoring to small and large group teacher instruction. Detailed real-time assessment allows educators to track a student’s progress in mastering the nearly 400 math skills in SO1’s roadmap for grades 4 through 9. Students proceed at their own pace. If gaps in learning appear, material is repeated, and new skills are introduced to build upon mastery of more elementary concepts. U.S. Education Secretary Arne Duncan and other educators have praised SO1’s approach and the program is spreading to Chicago and Washington, DC. An NYU study published in 2012 found mixed results on improving test scores, but cautioned that educational innovation is challenging to implement and success is usually incremental rather than abrupt. If SO1’s approach of ensuring a firm foundation of basic skills before advancing to more complex material is accurate, then improved performance may be more pronounced over several years. There is an emerging ecosystem of adaptive education providers; here are a few prominent examples. News Corporation’s Amplify provides a curriculum that follows the Common Core and combines game-like experiences with analytical tools. Knewton—a NYC-based startup—provides a technology platform that its content creator partners, such as textbook giant Houghton Mifflin Harcourt, use to create adaptive experiences for any subject matter. Many other startups exist as well, from Australia’s Smart Sparrow, whose platform allows anyone to create an interactive learning experience to San Francisco’s Inkling, which creates electronic textbooks that incorporate quizzes and self-assessment tools. Proponents of adaptive education see a revolution— The Economist argued that the new technology is ready to remake U.S. schools and then the world’s—but not everyone is sanguine. One concern is that the student-teacher relationship may weaken in an educational environment increasingly reliant upon technology. Some critics fear that qualified teachers may be replaced by more technology and less qualified instructors. Another concern is that teacher oversight and evaluation will become more overbearing with richer datasets. While adaptive education may change the job of a teacher, some changes will likely be beneficial to all: automation of repetitive tasks like quiz scoring, ability to leverage high quality curricula and learning content, and more motivated students. Some experts believe individual teachers could earn higher pay, as more technology enables a well-qualified teacher to effectively manage a larger classroom. Well-off students may disproportionally benefit from greater access to the new technologies, but economies of scale should help poorer school districts benefit as well. Many new resources should be affordable, some are even free; Khan Academy provides a free library of over four thousand high quality instructional videos across many subjects with adaptive assessments. Adaptive education does face some technological limits. For instance, while automated essay grading systems have been able to closely replicate scores given by human graders, experts have found ways to game them. Programs that cannot understand the content of the argument use the presence of long words and sentences as proxies for complex thought and clear expression. Still, with U.S. education slipping ten spots in both high school and college rates over the past three decades, there may be a lot to gain from successful implementation. Currently, there are limited data to support the promises of adaptive education, but most experts see large potential in a teaching approach that allows students to progress at their own learning pace.

Blog Post by Steven J. Markovich July 1, 2013 Renewing America
Sub-Saharan Africa

The Underside of “Africa Rising”

This is a guest post by Jim Sanders, a career, now retired, West Africa watcher for various federal agencies. The views expressed below are his personal views and do not reflect those of his former employers. Occasionally, the financial press experiences a twinge of conscience, or so it seems. News of Africa’s economic progress, in particular the growth of its middle classes, thrums almost daily though a range of papers. But this spring the Financial Times’ Simon Kuper slammed on the brakes. “Poor people’s analyses rarely fit neatly into the formats through which the ruling class interprets the world,” he wrote. Such people are “rarely interviewed,” he added, concluding that “we’re exactly the media that an unequal world requires.” A couple months later, Fortune Magazine reported on the publication of Cotton Tenants: Three Families, a manuscript drafted by James Agee, based on his 1936 investigation of Alabama tenant farmers for Fortune, his employer at the time. The magazine never used Agee’s report and it has only now been published. Agee’s work focuses on the American south, but it illuminates capitalism’s dark underbelly everywhere, the poverty it breeds, the mindsets it fosters, and those that sustain it. His subjects don’t think of life as “in the least controllable.” They “welter on their living as on water, from one hour to the next…” They feel that “structures of government are irrelevant if not indeed inimical to them.” And, “the infiltration of all that has to do with the outside world is slow, verbal, and distorted in transit.” Despite substantial economic progress, many in Africa, like the cotton farmers about whom Agee wrote, remain imprisoned by circumstances. “My boyfriend bought me this,” a young Malian sex worker said of her counterfeit smartphone. “We sleep together and he gives me money to buy food and other things I need. Because he is a soldier he is at least paid, even if it is not enough.” Another said of her work, "I don’t want to do this, but I have no choice. It is really bad but this is the only way for me to get money at the moment." In his introduction to Cotton Tenants, Adam Haslett notes that “close and thorough description of people’s actual circumstances in the manner of Agee’s long-form report from Alabama,” helps defog reality. We need more of this type of genre to put Africa’s economic growth into perspective.

Blog Post by Guest Blogger for John Campbell June 24, 2013 Africa in Transition
Labor and Employment

Policy Initiative Spotlight: A One-Stop Welfare Shop

The United Kingdom is implementing a major welfare reform, replacing a constellation of social support programs with a single monthly payment, the universal credit. The amount a recipient receives will be based on income level of the prior month, with additional amounts for disability, caring responsibilities, housing costs, and children. Touted as the most significant reform since the 1940s, the universal credit went into pilot phase in April 2013, with broader rollout to run from October 2013 to October 2017. The reform has two major goals: aligning recipient incentives to “ensure that work always pays” and to simplify the social system. The universal credit is promoted by conservative MP Iain Duncan Smith, who has led the Department for Work and Pensions (DWP) since May 2010. The universal credit will merge six working-age programs: 1. income-based jobseeker’s allowance, 2. income-related employment and support allowance, 3. income support, 4. child tax credit, 5. working tax credit, and 6. housing benefits. Proponents of the reform are concerned about a “poverty trap” (also known as a “benefit trap”), when social program recipients have a strong disincentive to work or seek a higher paying job because the value of government benefits they would lose is higher than the incremental wages they would earn, a consequence of phase-outs that reduce benefit eligibility as income rises. Phase-outs—also referred to as means-tests—are intended to concentrate benefits on the neediest, and keep overall program costs in line. Poverty traps come into play not only in anti-poverty programs, but also in other social programs such as health insurance subsidies. One method of abating poverty traps is to gradually phase-out benefits as incomes increase, rather than taking away the entire benefit when a particular income threshold is crossed. An analysis of the UK’s universal credit scheme shows a withdrawal rate—the rate at which benefits are reduced for every incremental dollar of income beyond an initial threshold—of 65 percent, though the income threshold for the phase-out varies by family size and other factors. That is a more than triple the rate of the U.S. earned income tax credit (EITC), which provides assistance to low income families through the income tax code. EITC is a refundable tax credit introduced in 1975 that has been expanded several times since, most notably in 1993. In 2013, the highest EITC withdrawal rate was 21 percent – meaning that a recipient would only lose 21 cents in benefits for each additional dollar earned. The U.S. EITC experience does appear to create strong incentives for welfare recipients to earn more. Indeed, studies show that the EITC is effective in encouraging employment, with long-term benefits to children of recipients. The UK’s universal credit scheme will pay for all benefits once a month, designed to mimic how salaries are distributed so that recipients gain experience in budgeting. The reform also seeks to simplify the administrative burdens for the government and beneficiaries, on the theory that more accurate information will help reduce fraud. Claimants will also have a one-stop shop for social programs, intended to help them seamlessly transition from one program to another as their life circumstances change. This one-stop shop will be online, where claims will be entered and managed, and employers will be required to provide weekly data to the government so it can verify claimant eligibility. Opponents of universal credit have pointed to the potential for information technology snafus as a major concern. Critics worry further about the disparate effects on recipients. DWP estimates that 3.1 million households would qualify for higher benefits under universal credit, while 2.8 million households would be entitled to less. While the transition to universal credit will be managed in a way so that existing recipients will not face a shortfall, there will be winners and losers among new claimants. Couples without children are expected to lose the most. Detractors also argue that the benefits are overhyped, and see holes in the implementation, from IT resources to uncertainty over the role of local councils, who will likely bear the burden of assisting those who have difficulty with the benefits website. Some also argue that the reforms do not go far enough to restrain the growth of social support programs. On balance, the UK is attempting an interesting reform which may better align support and incentives to those in need. DWP will assess the performance of its reform through the evaluation framework it issued in December 2012. While specific analyses are under development, DWP set five themes, including a “test and learn mindset” as well as more traditional cost-benefit analysis and evaluations of changing attitudes and behaviors. The ability of claimants to apply online will be an early test; the DWP target is for 50 percent of applicable claims to be made online when universal credit is launched nationally, rising to 80 percent by 2017.

Blog Post by Steven J. Markovich June 11, 2013 Renewing America

Education

Policy Initiative Spotlight: Employing Post-9/11 Veterans

The Obama administration’s “Joining Forces” initiative hopes to decrease the high rate of unemployment for new (post-9/11) vets.

Blog Post by Jonathan Masters May 24, 2013 Renewing America
United States

The Shrinking U.S. Labor Force and Fed Policy

Does the large drop in the U.S. labor force participation rate justify a monetary policy that is easier, for longer, than suggested by our models or the Fed’s current description of its policy? Chris Erceg and Andy Levin, two senior researchers at the Fed now on leave at the IMF, argue yes. Their analysis will provide fuel to the monetary policy doves who argue the Fed is failing to meet its employment mandate, and points to a battle ahead. But it doesn’t really settle questions about whether monetary policy is an effective tool for bringing these workers back into the work force, or whether it can be done without creating inflationary pressure (which speaks to other leg of the Fed’s mandate). Still, their paper is an important read. The unexplained fall in labor force participation Their first chart shows the decline in labor force participation since 2007, both in absolute terms and relative to a Bureau of Labor Statistics (BLS) forecast for the future path of the participation rate made in 2007. It suggests that the sharp drop in the participation rate since 2007 was unexpected and hard to explain by the structural factors that affected participation in the past such as the aging of the population, or shifts in specific groups such as female or youth workers. This means that the gap between the two lines, the "participation gap," must be cyclical--the result of the great recession--or because of some new structural factors that the BLS didn’t anticipate. The structural argument deserves some elaboration. Recall that labor force participation actually peaked around 2000 and was on a downtrend even before the great recession (see next chart). One view is that this means there are even more "missing workers" put out of jobs, involuntarily, by the weak recovery of 2000-07. I think a better explanation is that there were already structural changes underway in the workforce that are not captured by the BLS forecast. From this perspective, the great recession is an accelerant that forces change (eg, in terms of labor-saving by firms, changes in long-term competitiveness, or changes demand for skills) that had been building already. Whether you want to describe this as cyclical or structural, these workers may not be easily brought back into the labor force through expansionary macro policies. Civilian Labor Force Participation Rate, 16 and older Source: BLS This next chart from Erceg and Levin shows that the participation gap (derived from the first chart)-- the orange dotted line--now exceeds the gap between current unemployment and the long-run unemployment rate (the purple line). It shows that the participation rate adjusts more slowly than the unemployment rate. It also highlights the amount of slack that needs to be absorbed is potentially much larger than suggested by the unemployment rate alone. The bulk of the Erceg and Levin paper then addresses two critical questions: Is this structural or cyclical? And will it persist as the economy recovers (and the unemployment rate drops)? On the question of cyclicality, the paper looks at a cross-section of state participation rates during the recession (see below). States with the deepest recessions had the sharpest fall in unemployment, which they argue suggests it’s weak demand that is driving much of the recent decline in participation. State data has been criticized in the past as subject to noise and error, and others suggest that looking at flows into and out of the labor force is more consistent with a structural explanation. In any event, this result is central to the debate over whether ’this time is different’ because the post-war experience has been that participation is largely non-cyclical. The Fed’s employment mandate "The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates." (Federal Reserve Act, 1977) The Fed is unusual among central banks in having a statutory dual mandate to ensure both maximum employment and stable prices. The Fed has long stressed that in most circumstances these two objectives are consistent, and further that it looks at a wide array of indicators in fulfilling its mandate. However, much economic theory, and the Fed itself, have put the spotlight on the unemployment rate (and its relationship to the longer run, normal rate of unemployment) as the most important single metric of labor conditions. This focus has intensified since the Fed, in December 2012, announced that an unemployment rate of 6.5 percent would serve as a threshold (not a trigger) for tightening policy from the current near-zero levels. The dilemma for the FOMC is how to react if the unemployment rate declines to below 6.5 percent while the participation rate remains low. Should we look at the sum of the unemployment and participation gaps as the measure Fed policy must address? In assessing this argument, the Fed will have to answer three questions in particular: How low can the unemployment rate go before inflationary pressures emerge? The Fed’s estimates of the central tendency for the longer-run, normal unemployment rate, at 5.2-6 percent, is substantially higher than they forecast several years ago, reminding us of the inherent uncertainty in these traditional macro relationships. Does a high participation gap put downward pressure on inflation? Certainly inflationary pressures remain muted, even too low (recent work by Lars Svensson and others suggest inflation below 1 percent can be distortionary and undermine a credible central bank’s policy). But the great recession also has undermined notions of a tight relationship between slack in the economy and inflation (inflationary expectations haven’t moved very much with the recession) suggesting the need for caution during the upturn as well. Does the existence of a pool of workers that have left the workforce, for example to retire or to go to school because there are limited job opportunities, put downward pressure on the wages of those who have jobs? Is monetary policy the right tool to address the participation gap? Recent research on long-term unemployment suggests that, once workers are unemployed more than six months, their connection to the work force become tenuous. In such cases, even if their exit was the result of a demand shock, at some point they lose the skills, the connectivity, and the resume to reenter easily. What starts as cyclical becomes structural. Monetary policy may be a blunt tool for addressing the participation gap, suggesting targeted fiscal policies (e.g., job retraining and employment subsidies) may be more effective tools. The monetary policy dove will argue that absent fiscal policy, monetary policy is the best tool in the toolbox, while critics will weigh these potentially modest benefits against the cost of an even larger balance sheet. None of these questions have easy answers. Erceg and Levin are careful to emphasize the limits of their analysis. But their work, and the notion that the Fed needs to target policy to reduce this gap, may be front and center at future FOMC meetings.

Blog Post by Robert Kahn May 8, 2013 Macro and Markets
Labor and Employment

Policy Initiative Spotlight: Multiyear Budgeting

The U.S. budget process has become increasingly dysfunctional, a large factor in Standard and Poor’s downgrading the U.S. sovereign credit rating in 2011. Budgets were always passed for each fiscal year from 1977 to 1998, but in the thirteen fiscal years since, Congress has failed to adopt a budget five times, including for FY 2013. A continuing resolution—a stopgap spending measure—was passed in late March to fund discretionary programs of the federal government through the end of September, the last month of the 2013 fiscal year. In practice, the annual budget process is ad hoc, where crises often drive decision-making. While overhauling the budget process would not cure partisan rancor, multiyear budgeting could improve the process by forcing policymakers to adopt a longer term perspective. Many experts have recommended that the United States embrace a medium term expenditure framework (MTEF). MTEFs have been successfully deployed in developed and developing nations, and are recommended by both the World Bank and the International Monetary Fund. Germany was an early pioneer, enacting a MTEF in 1969. More than 120 other countries have adopted some form of MTEF, many since 1990. A properly designed MTEF creates a budget for the next three to five years based upon current forecasts and policy priorities. Under this framework, a budget can be modified in the intervening years to account for economic changes, unforeseen events, and forecast errors, but its broad outlines would limit how much could be altered. This approach could allow the government to balance its books not just in the boom years, but over an economic cycle. A properly executed MTEF could also improve debt reduction planning by requiring policymakers to align budget decisions with the nation’s long-term financial outlook. Indeed, empirical analysis indicates that MTEF adoption is associated with greater fiscal discipline. While the U.S. budget is a one-year plan, there are multiyear elements to the current process, such as projections and analysis issued by the Congressional Budget Office (CBO) covering everything from the ten-year cost of a proposed farm bill, to the long-term cost of the U.S. Army’s choice in ground combat vehicles. Some federal agencies provide five-year budget plans, including the Department of Defense and NASA, though these are merely non-binding recommendations. Many other agencies—such as the Department of Energy and the National Institute of Health—do not submit multiyear estimates. Congress also has limited control over large sections of the budget. For instance, in 2011, mandatory spending—such as Social Security, Medicare, unemployment insurance, and veterans’ benefits—was $2 trillion of the $3.6 trillion in spending, or a majority of the budget. Additionally, some revenue is dedicated to a specific purpose, such as the federal gas tax which goes to the Highway Trust Fund. Overall, the U.S. federal government’s implementation of medium-term planning techniques trails most other developed nations. In 2009, the OECD ranked the United States 25th of 30 nations in its use of medium-term perspective in the budget process. OECD Index comprised between 0 (no MT budget strength) and 1 (high MT budget strength). The lack of long-term planning is particularly a concern for multiyear infrastructure and scientific projects. For instance, U.S. research labs face difficulty in collaborating with foreign research institutions on major scientific projects because their funding is set annually, unlike many of their foreign peers. Major initiatives already underway can be cancelled or restructured through the annual budget process, particularly after the election of a new president. For instance, the Obama administration cancelled NASA’s Constellation program initiated under the Bush Administration. The 2014 budget process, which does not look promising, seems to underscore the nation’s accounting woes. The White House officially released its 2014 budget on April 10, almost two months after the legal deadline, while the Senate passed its first budget proposal in four years.

Blog Post by Steven J. Markovich April 26, 2013 Renewing America

Infrastructure

Policy Initiative Spotlight: Teddy’s Big Ditch Grows Deeper

This summer, a billion-dollar project will begin to raise the road deck of the Bayonne Bridge that links Staten Island to Jersey City, and provides access to Manhattan via the Holland Tunnel. The project is not being undertaken because of safety concerns about the current bridge, but rather to allow larger container ships to pass underneath it and reach the Port of New York and New Jersey. It’s just one of several port projects in anticipation of the widening of the Panama Canal. By early 2015, the Panama Canal is scheduled to complete a $5.25 billion expansion project that began in 2007 to widen and deepen existing navigational channels to allow larger ships to traverse the isthmus, and construct new sets of locks to increase capacity. The scale of global trade has increased remarkably since Theodore Roosevelt championed the U.S. effort to build the canal. From 1915 to 2012, tonnage to cross the 48-mile link increased from 5 million to 334 million. Today, the largest ships that can cross the isthmus are the so-called panamax vessels that can carry 4,500 shipping containers. The expansion project—the largest undertaken since the canal opened in 1914—will allow post-panamax vessels carrying nearly three times that cargo to make that journey. It’s an important development for global commerce. Post-panamax ships have lower shipping costs; per container costs are more than 50 percent less than a panamax ship. While post-panamax vessels account for only 16 percent of the global container fleet, they already carry 45 percent of cargo, with those shares projected to respectively grow to 27 and 62 percent by 2013. Analysts say the canal's expansion will be a particular boon to the shipment of liquefied natural gas (LNG). LNG tankers are too large to pass through today’s Panama Canal. With the Sabine Pass LNG export terminal expected to open in Louisiana in 2015, and other terminals proposed, the expansion project is well-timed to aid the flow of natural gas from shale fields in the United States to Asian energy markets where the price for this resource is several times higher. Some experts estimate the canal expansion could reduce shipping costs on this route by $1 per million BTU. CFR Senior Fellow Michael Levi explained the benefits of a wider Panama Canal to LNG trade in a study published last year with the Brooking Institution’s Hamilton Project: “LNG tankers departing the Gulf of Mexico or the East Coast of the United States currently need to travel all the way around South America to reach Asia, adding considerable cost to their trips and eroding potential gains from trade.” The project has also prompted intranational competition. Los Angeles/Long Beach (LA/LB) is the nation’s largest port, handling 40 percent of U.S. cargo traffic. But with the canal expansion, eastern ports could potentially take up to a quarter of LA/LB’s business, so the port authority has planned $6 billion of upgrades, part of the $46 billion in upgrades to U.S. ports funded by public or private sources over the next five years. Today, just four U.S. ports are ready for post-panamax ships: Norfolk in the east and LA/LB, Oakland, and Seattle in the west. Colliers predicts another four will be post-panamax ready by 2015: Baltimore, New York, Miami, and Houston. The infrastructure investments at these ports and others such as Charleston, Savannah, and New Orleans, range from dredging waterways and adding cranes, to preparing intermodal support networks, including railways modifications for the increased height of double stacked containers. The raising of the Bayonne Bridge is one of seven port projects the Obama administration announced it would help expedite last summer, the first set of more than 40 infrastructure projects to be fast-tracked for review by executive order. The president said the "commitment to move these port projects forward faster will help drive job growth and strengthen the economy." Still, Robert Puentes, a transportation expert at the Brookings Institution stressed the need for greater federal leadership on this issue, perhaps in developing a comprehensive freight policy like many other nations. “I can’t see the federal government picking winners and losers” he said in a New York Times interview, but “they could provide a little more guidance — where right now they are providing none.”

Blog Post by Steven J. Markovich March 11, 2013 Renewing America
Labor and Employment

Policy Initiative Spotlight: The Global Squeeze on Tax Cheats

Midnight. A fishing trawler lurches violently in a squall off the coast of Marseille. A seemingly lifeless body is spotted adrift off the bow, and fished out of the roiling sea. No identification. No memory. Only three enigmatic clues bizarrely implanted in the man's hip: 000-7-17-12-0-14-26. Gemeinschaft Bank. Zurich. As Robert Ludlum illustrates so well in the opening scene of The Bourne Identity, few things convey a greater sense of mystery and international intrigue than a numbered Swiss bank account. But to the chagrin of the next generation of spy novelists, the potency of this enduring icon of secrecy may be fading with the expansion of a new initiative known as the Foreign Account Tax Compliance Act. Enacted in 2010, the legislation requires foreign financial institutions to notify the IRS about offshore accounts of U.S. taxpayers worth more than $50,000. The bill was passed in the wake of the 2009 UBS scandal, in which the Swiss banking giant admitted to conspiring to defraud Uncle Sam of millions of dollars, and helping their clients hide foreign accounts. The bank eventually agreed to divulge the identities of potential U.S. tax cheats and pay $780 million to settle with federal authorities. U.S. taxpayers are required to pay taxes on all income earned worldwide, and must report foreign accounts if, at any time during the calendar year, the value tops $10,000. While there are significant penalties for non-disclosure, including a fine up to 50 percent of the account value, many taxpayers keep these finances in the dark. The non-partisan Congressional Research Service estimates that individual tax evasion costs the government some $40 billion to $70 billion annually—enough to cover the annual budgets of the Treasury and Commerce Departments combined. FATCA's reporting regime hopes to bring many of these foreign accounts into the daylight. This month, the Swiss government became the latest of a handful of FATCA signatories, part of a robust campaign by the Obama administration to create an international network of over 50 nations combating tax evasion. Beginning January of next year, the Treasury Department will start enforcing the law and issuing stiff penalties to individuals and firms in non-compliance. Institutions unwilling to conform face a ban from U.S. securities markets. "The real story here is that it looks like it is going to become a global model," Manal Corwin, deputy assistant Treasury secretary for international tax affairs, told Reuters in an interview earlier this year. Additional bilateral agreements with major economies like Japan, France, Germany, Canada and many others are in the pipeline. Even China, which has publicly criticized the initiative, is reportedly in talks with Washington behind closed doors. However, FATCA has been criticized by some companies and U.S. allies as an overly burdensome and potentially futile crusade. Some large foreign financial institutions may be forced to dole out more than $250 million to comply with the law in the near term, although estimates vary widely. Other critics contend that FATCA will inevitably bear little fruit unless all global tax jurisdictions, particularly well-known tax havens like those in the Caribbean, are brought into the fold—a seemingly unlikely event. There are also significant privacy concerns. Treasury has acknowledged that reciprocity is a central component of FATCA, where automatic information-sharing between participating countries will be the rule. The IRS already supplies taxpayer information to some partner nations, but critics are concerned about the expansion of this to regions with potential governance issues, such as Latin America. U.S. officials counter that each nation's respective tax agency is carefully vetted before deals are penned. At the international level, at least among the world's wealthiest nations, the idea seems to be gaining traction. "I warmly welcome the co-operative and multilateral approach on which [FATCA] is based," noted OECD Secretary-General Angel Gurría last November. "We at the OECD have always stressed the need to combat offshore tax evasion while keeping compliance costs as low as possible. A proliferation of different systems is in nobody’s interest."

Blog Post by Jonathan Masters February 27, 2013 Renewing America
Labor and Employment

Policy Initiative Spotlight: Social Programs Funded by Success

Last month Harvard’s Kennedy School and the Rockefeller Foundation announced a program to provide free technical assistance to four states and local governments pursuing social impact bonds (SIBs), one of the first efforts in the United States to scale up an innovative tool for increasing the quantity and effectiveness of social spending. In announcing the program, Jeffrey Liebman, who oversees the effort, said that "social impact bonds bring together the public, private, and nonprofit sectors in a program designed to boost social innovation and direct public dollars to programs that work." SIBs are a relatively new phenomenon designed to funnel private investor money to social programs. The world’s first SIB was launched in September 2010 in the United Kingdom. Social Finance raised $8 million from a pool of 17 investors—mostly philanthropic institutions—to fund services to short-sentence male prisoners exiting Peterborough prison with the aim of keeping them out of prison in the future, thus saving money for the government. Funding will go to outside organizations providing the services, such as the YMCA. Investors will fund the program for six years, and will only recoup their initial investment and earn a return if the program is successful at reducing recidivism. Currently 60 percent of short sentence prisoners re-offend within a year; if the program can reduce that by 7.5 percent, then the government will pay investors back their initial investment; if the program can exceed the goal, then investors will earn a greater return. In the United States, Massachusetts has been a leader in SIB adoption. The state authorized funding up to $50 million over several years to reimburse investors in successful programs that deliver savings to the commonwealth, with programs targeted to needy groups such as the homeless. New York City and Minnesota have also set aside funding for SIBs. While SIBs in theory only cost governments if they succeed, they may require higher implementation costs. A successful SIB requires not only service providers, but a willing pool of investors, a manager who coordinates activity and financing, and impartial evaluators who can judge the level of success of a program. Still, there is significant excitement about the potential of SIBs to enhance certain kinds of social programs. An extensive report by the McKinsey and Company management consultancy found that homelessness, and juvenile and adult criminal justice, could be fertile ground for SIBs. The authors advised three core actions: "developing a robust education and communications plan, embracing SIBs primarily for their social (rather than financial) benefits, and paying careful attention to design and implementation." As this model spreads to American shores, the United Kingdom continues to innovate. Allia has launched the Future for Children Bond, which is the first SIB for retail investors rather than large philanthropic organizations. Individual investors who can afford a minimum of £15,000 can invest in a bond fund combining a more traditional loan to a provider of affordable housing with a SIB to deliver family support therapy to needy 11-16 year olds.

Blog Post by Steven J. Markovich February 8, 2013 Renewing America
Education

Policy Initiative Spotlight: Germany Lends a Hand to U.S. Workforce Development

Perhaps the most prized real estate at the annual State of the Union address is the first lady's box, where, for over thirty years, persons of great distinction have been invited to sit and be recognized in the national spotlight. Foreign dignitaries, war heroes, renowned academics, innovators, and others of such esteem frequently receive the honor. But no one sat closer to Mrs. Obama last year than Jackie Bray, a once-unemployed, single mother from North Carolina whose return to the manufacturing workforce was in part the result of a training model developed in Germany. After losing work as a packaging mechanic, Bray enrolled in a new vocational program at Central Piedmont Community College (CPCC), one of the largest school systems in North Carolina. CPCC has partnered with Siemens, the German engineering conglomerate, to design the types of technical training classes that graduates need to work at their sprawling new Charlotte factory. For qualifying students like Bray, the company pays for tuition and training before bringing them on full-time to manufacture generators and turbines. CPCC and Siemens also participate in an award-winning initiative called Apprenticeship 2000, a four-year program for select high-school juniors and seniors in which classroom instruction is combined with hands-on training at a Charlotte area technical company. While the program is still small, all of the apprenticeships are paid and result in a job. The school has built on this partnership by signing a pioneering agreement with a regional German chamber of commerce to offer its students an advanced manufacturing education that is certified by German industries. This type of dual system, which partners private industry with vocational schools (typically with the support of government), has been the norm in Germany for centuries. About 60 percent of German high-school students looking to continue their education pursue an apprenticeship. Approximately half a million German businesses use apprenticeships to train roughly 1.5 million workers in 350 recognized jobs every year. While still relatively rare in the United States (where it might be called a co-op), the German model is one the White House hopes to scale up. "I want every American looking for work to have the same opportunity as Jackie [Bray] did," the president noted in his 2012 address." Join me in a national commitment to train 2 million Americans with skills that will lead directly to a job." In May of last year, the German Embassy responded to the president's challenge by launching the "Skills Initiative" at a conference sponsored by the Washington, DC-based Aspen Institute. The bilateral program aims to unite U.S. and German businesses with local education and training providers like CPCC. German Ambassador Peter Ammon has pledged to make the initiative a cornerstone of the mission's work in the United States, and is currently working with the governors of Ohio, Maryland, Massachusetts, Pennsylvania, Wisconsin, and Virginia. For the world's fourth largest economy, it is not only an opportunity for cultural exchange, but a sound financial investment. More than 3,400 German businesses have investments in the United States, where the supply of high-skilled labor has not kept pace with the demand from those companies with U.S. operations. German firms currently employ more than 550,000 American workers, roughly 11 percent of the "insourced" jobs in the United States. And nearly half of these are in manufacturing. Germany accounted for $215 billion in U.S. foreign direct investment (fourth largest) in 2011, creating jobs in many struggling state and local economies. For the United States, the partnership provides a highly effective vocational training model that could not only help educate the next generation of workers, but also provide a viable and attractive alternative to the four-year college trajectory.

Blog Post by Jonathan Masters January 30, 2013 Renewing America
Sub-Saharan Africa

Nigeria: What if Globalization Reverses?

This is a guest post by Jim Sanders, a career, now retired, West Africa watcher for various federal agencies. The views expressed below are his personal views and do not reflect those of his former employers. According to Fortune Magazine, investments in foreign held assets are decreasing. Joshua Cooper Ramo points out that, “figures on investment in assets held overseas, probably the best indicator of enthusiasm for globalism, are drifting down toward 40 percent from more than 50 percent in 2008.” Ramo further notes that during “most of the past twenty years trade has raced ahead of global economic growth,” but in the last twenty-four months, it has slowed and, “this year, globally we’ll be below the twenty year average rate of trade growth yet again.” According to Ramo, “We find everywhere signs of a world turning inward and of an era when the inside will define success and deliver growth—for companies, for nations, even for your career—in the way the outside once did.” If true, and if sustained, where would such a trend toward an “inside world” leave Nigeria? The country has, and does, depend heavily on export markets and foreign investment to maintain its oil industry, which provides 95 percent of the country’s foreign exchange earnings and 80 percent of its budgetary revenue. Moreover, trade integration is believed to contribute to economic performance. Nigerian officials have considered “deeper trade integration as a means to foster economic growth and alleviate poverty,” according to some researchers. Yet the country’s National Bureau of Statistics reports unemployment at 21 percent, implying, says the Leadership newspaper, “policy failure.” Economic shortcomings are paralleled by stalling anti-corruption efforts. Transparency International ranked Nigeria 139 out of 179 countries surveyed, making it, the second most corrupt country in West Africa. Security continues to deteriorate. Nigeria is now the seventh-most terrorized country in the world, according to the Global Terrorism Index. Ramo argues that when globalizing eras end, they “generally take nations that don’t adapt for a very unpleasant ride.” Operating on old ideas, their leaders typically fail to grasp dynamics of the new age. This is what revolutions are made of, he suggests. If so, Nigeria may be closer to the brink than previously thought.

Blog Post by Guest Blogger for John Campbell December 28, 2012 Africa in Transition
Infrastructure

Policy Initiative Spotlight: Oklahoma City MAPS Out Revitalization

For communities looking to attract the coveted highly-skilled, highly-paid workforce, there is often little substitute for a locale's livability. Job opportunities, no matter how plum, may fail to lure workers if a city is determined to be undesirable by potential emigrants. In describing what motivates the so-called Creative Class to relocate, urban theorist Richard Florida notes that "quality-of-place”—a city's built and natural environment, its population diversity and vibrancy—is the deciding factor. Perhaps no U.S. city has proved more effective at recognizing their quality-of-life shortcomings and making a drastic effort to turn things around than Oklahoma City. The impetus for action, as is often the case, was a crisis. "It was a really destitute place to live," said Roy H. Williams, president and CEO of Oklahoma City's Chamber of Commerce, referring to the state capital in the late 1980's and early 1990's. After booming on a ten-fold increase in the going rate for Oklahoma crude between 1972 and 1981, plummeting energy prices in subsequent years decimated OKC's industry, financial institutions, real estate values and, of course, city coffers. But the final straw didn't come until 1991, when the city lost out to Indianapolis in a heated competition to woo United Airlines into building a local maintenance hub—a move that would have brought more than a thousand jobs. In the end, the company told city officials that the deciding factor was Indianapolis' higher quality-of-life. As OKC's leaders licked their wounds in the aftermath, the Chamber of Commerce convened for a major strategy session. "We knew we had to do something out-of-the-box," Williams told me, "We had to build a better product." Enter the Metropolitan Area Projects Series or MAPS, as it's commonly known. Hashed out by OKC's business and policy community, the public-private initiative, passed in December 1993, laid out a series of major capital projects for construction, including a new sports arena, ballpark, library, trolley transit system, music hall, convention center, and the renovation of a downtown historic district known as Bricktown. This first program, or MAPS 1, was funded by $309 million in entirely local funds, without the issuance of debt, through a 1 percent sales tax increase that would sunset after 5.5 years. Indeed, MAPS 1 was so successful the city has pushed forward with two more iterations. MAPS 2, also known as "MAPS for Kids," focused on OKC's crumbling education infrastructure, investing close to $500 million in construction for local public schools. MAPS 3, which passed in December 2009 and has projects expected to run through 2017, will provide nearly $800 million in taxpayer funds for a 70-acre grand central park, over 50 miles of new biking and walking trails, and other recreational upgrades. Those involved in the process say MAPS has worked so well for so long (across multiple administrations) because of the close partnership between the public and private sectors, the fact that each initiative has been targeted and limited in scope, and that there has been such a strong track record of the city delivering on its promises. Indeed, a Chamber of Commerce report states that the total value of new investment related to MAPS from the mid-1990s through 2008 totaled about $3.1 billion, with an additional $1.9 billion announced. But perhaps the most dramatic symbol of the city's revitalization came in 2008, when the Seattle Supersonics moved to Oklahoma City and, in a matter of four years, made the NBA finals and was deemed the number one sports franchise in America, an ESPN ranking based on an analysis of finances and fan surveys. "It’s more than just a basketball team: it’s the culmination of 20 years of civic reinvention, and the promise of more to come," writes Sam Anderson for New York Times Magazine on the exceptional rise of the Thunder. "After all of that sacrifice — the grind of municipal meetings and penny taxes and planning boards, the dust and noise and uncertainty of construction, the horror of 1995 — the little city in the middle of No Man’s Land has finally arrived on the world stage."

Blog Post by Jonathan Masters December 10, 2012 Renewing America
China

Labor Data Show That China Is a Bubble Waiting to Burst

China “may have” overinvested to the tune of 12-20% of gross domestic product (GDP) between 2007 and 2011 – this is the diplomatically worded conclusion of a working paper released last week by the IMF. This week’s Geo-Graphic backs it up. As our figure above shows, the share of the Chinese labor force working in manufacturing and construction, at 38%, is roughly twice the global average – towering well above manufacturing powerhouses like Germany (25%) and South Korea (23%). Manufacturing’s share of the Chinese work force, at 29%, is also 6 percentage points higher than the level at which other fast growing economies have typically begun slowing. Once that share exceeds 23%, according to analysis by Barry Eichengreen, it “becomes necessary to shift workers into services, where productivity growth is slower.” Construction’s share of the Chinese labor force, at 9%, is also 2 percentage points higher than in the United States at the peak of the housing bubble in September 2006. Labor data therefore suggest that China is headed for an extended slowdown in GDP growth. IMF: Is China Over-Investing and Does It Matter? Eichengreen, Park, and Shin: When Fast-Growing Economies Slow Down Orszag: China’s New Leaders Face an Economic Turning Point Mallaby: Beware Membership of This Elite Club

Blog Post by Benn Steil and Dinah Walker December 5, 2012 Geo-Graphics
Labor and Employment

Policy Initiative Spotlight: Trying to Depolarize Congress

Congressional polarization has steadily increased over the last twenty-five years, according to research by political scientists Howard Rosenthal and Keith Poole. Their analysis indicates that the U.S. House and Senate are more polarized today than at any other time since the end of Reconstruction. The 2012 election continued this trend. Polarization matters because starker differences between the parties normally make problem solving more difficult. Party leaders become increasingly beholden to the collective will of more extreme caucuses and less able to compromise and build consensus for balanced legislation. “Everybody is afraid to give an inch,” according to Ohio representative Steven C. LaTourette. There are a variety of explanations for rising polarization; a commonly cited one is gerrymandering. Gerrymandering is drawing political boundaries to secure an advantage, and it has a long and ignominious history. In 1812, Massachusetts Governor Elbert Gerry signed a redistricting bill that heavily favored his party. Despite this etymology, the practice has deeper roots in America, and even can be found in ancient Rome where censors manipulated membership in the tribal assembly after each five year census. But the science of building safe voting blocs has made great strides since Caesar’s day. Modern demographic data and sophisticated mapping software have allowed state leaders to draw bizarrely shaped districts with skewed voting patterns. While most state legislatures draw voting districts, not so in Iowa. Since 1982, Iowa’s nonpolitical Legislative Service Agency, responsible for things such as maintaining the legislature’s library, has drawn districts. Iowan laws also limit the carving up of municipalities and counties. With political boundaries not drawn by partisan hands, Iowa has generally had more competitive House races. In 2010, California voters decided to hand district drawing power to a commission of citizens, but some have criticized the resulting districts, seeing undue influence by party leaders. Gerrymandered districts heighten the influence of primaries; when one party holds an overwhelming advantage in registered voters, the general election can be a mere afterthought. Since primaries have lower voter turnout skewed towards party bases, more extreme candidates often have an advantage. While statewide races, such as for a Senate seat, cannot be gerrymandered, primary voters can still hold disproportionate sway in states where one political party enjoys a large majority, In an effort to address this, California voters passed Proposition 14 in 2010 to amend that state’s constitution to replace traditional partisan primaries with non-partisan blanket primaries. Under this system—similar to one adopted by the state of Washington in 2004—the top two vote getters in the primary earn a spot on the general election ballot, regardless of party affiliation. Louisiana adopted a similar, run-off system in 1978. In 2012, five of California’s fifty-three races pitted incumbents against challengers from the same party. Two Democrats, Pete Stark and Joe Baca—both representing districts with more than a 20 percentage point advantage in Democratic party registration—lost to Democratic challengers who had garnered fewer votes in the primary round. Were these triumphs for moderation? Perhaps. Rosenthal and Poole’s analysis assigned a “DW-Nominate” score—basically a polarization index—to each member of the House; Stark had the sixth highest score among Democrats, but Baca’s was relatively moderate, ranking 140th out of 193 Democrats. Both representatives were targets of an anti-incumbency superPAC. So far the results of these efforts are clearly modest, and have done little to reverse the trend towards rising political polarization in Congress. And it’s not clear that other states will follow their lead. In a ballot measure in November, for example, Arizona voters rejected a top-two primary system.

Blog Post by Steven J. Markovich November 16, 2012 Renewing America
Labor and Employment

Policy Initiative Spotlight: The Israeli R&D Model

The innovations that will drive a knowledge-based economy and employ the next generation of high-skilled workers require a national commitment to research and development, and no nation has made this a higher priority than Israel. The country of 8 million invests more money in R&D per GDP than any other. And while the United States still leads the world in total R&D spending, it ranks ninth when economies are weighted. Israel has received no shortage of praise for its innovative culture in recent years, a success perhaps best articulated by former CFR fellow Daniel Senor in his book Start-Up Nation. In addition to the highest R&D to GDP, Israel also boasts the most start-up companies per capita, and the most scientists and technicians per capita, according to government figures. Interestingly, Israel does not provide R&D tax credits like most of its peers in the OECD, including the United States. Rather, it promotes these activities primarily through individual grants to competing applicant firms. The main program, administered by the Office of the Chief Scientist, finances up to 50 percent of approved R&D expenditures. Unlike tax incentives that solely depend on market forces, the grants allow the government to closely vet and monitor R&D projects. Some critics allege this type of control amounts to government's inefficient "picking winners and losers," but others like Gregory Tassey, Senior Economist for the U.S. National Institute of Standards and Technology, say that public-private R&D partnerships are critical in an increasingly international marketplace, particularly when it comes to primary and applied research. "U.S. industry has regularly increased its investment in short-term R&D to respond to growing competitive challenges in the global economy," he notes, "while regularly decreasing planned investments in the more radical research that provides the technology platforms for competing in future technology life cycles." In general, the case for greater federal support for R&D is based on a recognition that the private sector will underinvest in R&D because firms are unable to capture all of the benefits from these investments. In particular, governments are often greatly involved in R&D activities, like pure research, that do not have immediate commercial applications. Of course, greater federal R&D spending is not a panacea. Israel also has the requisite human capital to put this money to work. The country not only leverages the high-tech training provided to its military personnel (service is compulsory), but it also benefits from a wealth of researchers in the Jewish diaspora and educated ex-Soviet immigrants that moved to Israel in 1990s. But despite the aforementioned successes, experts say Israel's policies are far from perfect. One challenge has been keeping the economic benefits of these policies, such as job creation and income growth, at home. "Many Israeli start-ups are sold to the U.S. market and get absorbed into global firms, never really expanding in Israel," says OECD senior economist Mario Cervantes. "This is expected given the small size of the internal [Israeli] market, but it does raise questions about how much of the returns from innovation end up back in the economy."

Blog Post by Jonathan Masters November 2, 2012 Renewing America